Cheesecake Factory Inc (CAKE) 2007 Q1 法說會逐字稿

Good afternoon, my name is Eva, and I will be your conference operator today.

At this time, I would like to welcome you to the first quarter 2007 earnings conference call.

All lines have been placed on mute to prevent any background noise.

[OPERATOR INSTRUCTIONS]

Thank you, Mr.

Dixon you may begin your conference.

Thank you, operator.

Hello, everyone I'm Michael Dixon, CFO of The Cheesecake Factory, Inc., and welcome to our quarterly investor conference call.

[TECHNICAL DIFFICULTIES]

Ladies and gentlemen, I do appreciate your patience, you may resume.

I apologize for the technical difficulties and I understand it was quite staticy right from the beginning with that I'm going to just start over, if you've heard some of this before, I apologize.

As I mentioned I'm Michael Dixon, CFO of The Cheesecake Factory and welcome to our quarterly investor conference call.

This is also being broadcast live over the internet.

Also with us today is David Overton our Chairman of the Board and Chief Executive Officer, David's actually out in the field today and joining us from one of our restaurants.

Joe Peters, our Vice President, Investor Relations is also with us.

Before we get into the details, let me briefly cover our cautionary statement regarding risk factors and forward-looking statements in general.

Throughout our call today, items may be discussed that are not based on historical fact and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Actual results could differ materially from those stated or implied in forward-looking statements as a result of the factors detailed in today's press release and in our filings with the Securities and Exchange Commission.

All forward-looking statements made on this call speak only as of today's date and the Company undertakes no duty to update any forward-looking statements.

Our agenda for the call today will be as follows, first, we'll discuss The Cheesecake Factory's financial results for the first quarter of fiscal 2007 that ended on April 3, 2007.

We will refer to that quarter as the first quarter in our comments today.

We'll also give some color to our expectations for new restaurant openings and margins for the remainder of the year.

After that we'll open the call to questions and we'll be happy to answer as many questions as time allows.

We would still like to finish up with call in about 45 minutes so let's get started.

The first quarter was quite busy for us.

Aside from the regular operation and growth of our restaurant and bakery business, we held our second Investor Day conference in March and hopefully gave you a better understanding of the depth of our management team, our continued focus on quality, and our strategy for profitably growing our company for many years to come.

In addition we entered into a $200 million accelerated share repurchase agreement and secured a $200 million revolving line of credit.

We believe this is very good strategic move to lower our cost of capital in a favorable debt market and take advantage of what we believe to be an undervalued stock price.

I'll give you more detail on both of these transactions in a few minutes.

Finally, we saw some nice sales momentum in the quarter although tempered by some unfriendly weather.

We also had a couple of unusual margin pressures related to 409a taxes and some janitorial costs.

I'll cover these in more detail in our review of the margins.

Total revenues at The Cheesecake Factory for the first quarter increased approximately 16% to $357 million.

This was comprised of an approximate 17% increase in restaurant revenues and a 5% increase in bakery revenues.

The 17% increase in restaurant revenues represents an approximate 19% increase in total restaurant operating weeks resulting primarily from the openings of 22 new restaurants during the trailing 15 month period, coupled with an approximate 1.5% decrease in average sales per restaurant operating week.

Overall comparable sales of Cheesecake Factory and Grand Lux Cafe restaurants increased approximately 0.4% for the quarter, including an approximate $2.8 million impact from inclement weather during the quarter.

Excluding the estimated weather related impact, comparable sales of The Cheesecake Factory and Grand Lux Cafe would have increased approximately 1.2% or about in line with the average price increase in the menu during the quarter.

By concept that translates into an 0.8% increase at The Cheesecake Factory restaurants, and a 7.6% increase at the Grand Lux Cafes.

As we have previously discussed, we took an approximate 1.5% effective price increase in our winter 2007 menu change completed in mid-February to help offset known cost pressures primarily related to labor.

This [slaps] the 1% menu price increase we rolled out in the first quarter of the prior year.

I will remind everyone that we view menu price increases as a defensive measure to protect our margins against sustained or long-term cost pressures and generally not as a means of driving revenues.

Our next menu change will occur this summer which will provide another opportunity to review pricing.

Returning to the first quarter, average weekly sales at The Cheesecake Factory restaurants decreased about 2.4%.

After adjusting for the inclement weather, average weekly sales decreased approximately 1.6%.

This still slightly behind the change in comparable restaurant sales.

I think it is worth reminding our investors of some of the things that can impact this comparison.

First, the timing of new restaurant openings and the associated honeymoon sales period will always have an impact on the gap between comparable sales and average weekly sales.

When we open in existing markets we generally do not experience, nor do we expect the honeymoon sales trends of roughly 130% of sustainable volumes that we often see in new markets.

14 of the 20 Cheesecake Factory restaurants opened in fiscal 2006 are in existing markets.

The strategy of capturing additional profitable market share in areas that we know very well and where our brand recognition is high has worked well for us and we will continue to maximize this opportunity in the future.

Are we okay, operator?

Yes, sir, we are fine.

Okay, second, the restaurants we have opened over the last 18 months are considerably smaller on average than those opened prior to that time period.

The average number of productive seats is about 5% less at those restaurants not in the comp base compared to those restaurants in the comp base.

This is a function of opening restaurants in great markets as our preferred sites become available and appropriately fitting the restaurant size to those markets.

Most importantly, the returns at these locations are in excess of our cost of capital and deliver a fully capitalized return in excess of our 25% threshold.

We continue to be very pleased with sales at our Grand Lux Cafes.

As mentioned comparable sales at the Grand Lux Cafes increased 7% in the first quarter.

Excluding the impact from inclement weather comparable sales at Grand Lux Cafe would have increased 7.6%.

We believe this is a very solid performance for a young concept without advertising or promotions and operating in what is not yet a normalized sales environment.

Grand Lux is a strong, a viable concept for The Cheesecake Factory.

Longer term we feel very confident that there's plenty of profitable growth ahead for both The Cheesecake Factory and Grand Lux Cafe concepts.

With only 133 restaurants open to date the majority of our expected revenue growth for the next few years will continue to come from the openings of new restaurants.

Our longer term expectations for annual comparable restaurant sales growth remains in the range of menu price increases or about 1% to 2%.

In terms of our revenues to date in the second quarter, I think most of you know, especially those of you on the East Coast that the weather has continued to be a bit rough.

In fact we lost several operating days in the past two weeks and experienced slower traffic from storm and flood related issues.

In spite of this we have experienced relatively strong sales with comparable sales up about 1.2% overall or in the general range of our menu price increase.

Now granted it's early in the quarter but we are very pleased with this start.

For 2007, our overall revenue growth target is 17% to 18%.

This will be delivered primarily through new restaurants.

Our goal remains unchanged in opening as many as 21 new restaurants, including 5 Grand Lux Cafes.

As we discussed on our last quarterly conference call, 20% to 25% of these openings will be in new markets, with the remainder representing opportunities to return to those markets where we have been very successful.

In addition, a large number of our targeted 2007 openings will be in the Northeast which has proven to be a very strong geographic area for us with a number of high volume restaurants already operating in this region, but certainly enough population density to support several more.

We opened one Grand Lux Cafe in Aventura, Florida in the first quarter.

We expect to open two Cheesecake Factory restaurants in the second quarter, that's slightly ahead of our original plan.

The first of these two locations opened yesterday in Brandon, Florida and the second is scheduled to open in Braintree, Massachusetts.

By default, this means we will open as many as 18 restaurants in the second half of the year.

We will provide additional updates as to the expected number and timings of the restaurant openings by quarter during the year on our quarterly conference call.

Now we certainly recognize that a back-loaded opening schedule is the nature of our business due to the types of locations we choose.

We are not only prepared to accomplish this type of opening schedule in all functional areas of our business, but we consistently deliver on our stated growth objectives.

As a reminder we currently lease all of our restaurant locations many of which are in newly constructed or to-be constructed such as shopping malls, entertainment centers, cityscape strip centers and so forth.

As a result we rely heavily on our landlords to deliver our lease spaces for us, according to their original commitment so we that can build them out in a timely manner.

Our locations are upscale and highly customized, which helps to create the non-chain image that we enjoy with consumers and which we believe represents a significant competitive advantage for us.

But that also creates some unique design and permitting challenges.

Once we get the spaces from the landlords and obtain our building permits our construction and preopening processes are typically consistent usually taking four to six months to complete on average.

So as a result of these factors, it is not uncommon to have planned openings move a few weeks or even a month due to various factors outside of our control.

We have an incredible development team that consistently manages through these challenges to deliver restaurants on time and an equally talented operations team that gets these restaurants opened and running like a Cheesecake Factory from day one.

We always like to remind our investors that it takes about 90 to 120 days on average for our new restaurant to work through their normal grand opening inefficiencies, and for food and labor costs to reach their targeted operating profit margins.

So now before I move on to our bakery operations, let me give you an update on our Asian test concept.

We have formally named this concept Rock Sugar PanAsian Kitchen.

For those of you unfamiliar with Rock Sugar, it is an ingredient often used in Asian cooking.

While we are just about to sign the lease, we have already begun construction under an early entry agreement.

We plan to have the restaurant open some time late this year and it will be located in Century City here in the Los Angeles area.

This location is not included in the targeted 21 locations I just mentioned.

We will have additional updates on this concept on our second quarter conference call.

Now moving to our bakery operations.

Bakery sales net of intercompany bakery sales increased 5% in the first quarter from the year ago period to $13.5 million versus $12.9 million in the prior year.

Our plan for outside bakery sales in 2007 continues to focus on generating consistent and predictable sales and contribution margins.

We will leverage the added capacity from our East Coast facility to continue to meet the increasing requirement for our warehouse club customers and pick up new profitable business as it becomes available.

We expect bakery sales to increase approximately 8% to 10% in fiscal 2007 compared to the prior year.

While we remain optimistic with respect to opportunities to steadily build our bakery sales over time, bakery sales are not as predictable as our restaurant sales.

Our ability to predict the timing of bakery product shipments and contribution margins is very difficult due to the nature of that business, and the purchasing plans of our larger customers which may fluctuate from quarter to quarter.

In our view the bakery's most impactful roll to our business will continue to be at service as a dependable, high-quality producer of desserts for sale in our own restaurants, which will sell in excess of $200 million of desserts made in our bakery production facilities during fiscal 2007.

Approximately 15% of our restaurant sales consist of dessert sales which is a much larger percentage than achieved by most other casual dining restaurant concepts.

That covers our top line performance for the first quarter and the update on our new restaurant opening plan for fiscal 2007.

So now I'll briefly review the individual components of our operating margins for the first quarter.

Cost of sales remained flat at 25.1% of revenues for the first quarter compared to the same quarter last year and decreased from 26.3% in the December quarter.

This was more or less in line with the guidance we gave on our last call, perhaps just slightly higher due to the produce pressure from the winter freeze in California and a little bit of a mix shift.

The principle commodity categories for our restaurants include fresh produce, poultry, meat, fish and seafood, cheese, other fresh dairy products, bread, and general grocery items.

We're currently able to contract for the majority of the food commodity used in our operations for periods up to one year.

The remaining items consist primarily of fresh fish, dairy and some produce and poultry commodities so we have historically been unable to contract for periods longer than 30 days in most cases.

We have contracted with suppliers for those expected commodity requirements for fiscal 2007 that can be contracted, including cream cheese requirements for our bakery operations at a price per pound slightly less than the actual cost per pound in fiscal 2006.

We've also purchased cream cheese on the spot market as necessary to supplement our agreements.

Based on the contracts we have in place and our current expectations for those items that we cannot contract, we expect cost of sales as a percent of revenues to be approximately 40 to 50 basis points lower for fiscal 2007, compared to fiscal 2006, and in this same range for the second quarter that we're currently in.

Total labor expenses were 33.3% of revenues in the first quarter, up from the 32.4% in the same quarter last year, and from the 31.7% in the sequential quarter.

The increase over the previous year was driven by the minimum wage increases that went into effect on January 1st, and the deleveraging of labor cost, the lower average sales per week that resulted from the winter storms.

For fiscal 2007 we still expect labor expenses to be approximately 30 basis points higher than the prior year and in this same range for the second quarter primarily due to the implementation of the minimum wage increases that I just mentioned in 16 states in which we operate.

Now this does not factor in the possibility of an increase in the federal minimum wage.

If the federal minimum wage is increased we will need to factor that in to our summer menu price increase as well.

Other operating expenses were 23.8% of revenues for the first quarter, an increase from the 23.5% reported in the same quarter last year and from the 22.1% in the sequential quarter.

The increase versus the year ago quarter was mainly due to the janitorial contract repricing which I discussed at our recent Investor Day.

For fiscal 2007, we currently expect other operating costs as a percent of revenues to be 10 to 20 basis points higher relative to fiscal 2006 due to the higher janitorial costs and continued higher utility costs.

G&A expenses for the first quarter were 5.5% of revenue, up from the 5.1% in the prior year, but better than the 6.1% in the sequential quarter.

The increase relative to the year ago quarter was driven by the 409a tax payments that I also discussed at our Investor Day.

Excluding this one-time item, G&A expenses in the first quarter would have been about 5% of revenues or slightly better than we had expected as we continue to effectively manage our overhead costs in line with our revenues.

Our G&A expenses consist of two mayor components, the cost for our corporate, bakery and field supervision support team, which should grow at a lesser rate than revenues, and the cost for our restaurant management recruiting and training program, which should grow at a rate closer to our unit growth rate.

During fiscal 2007, we will continue to add resource to the corporate support training and field supervision activities of our business to properly support our restaurant and bakery operations for the planned 21 new restaurant openings.

Our expectation for total G&A expenses as a percent of revenues for the second quarter is about 10 to 20 basis points higher than the prior year but basically flat for the full fiscal year versus fiscal 2006 as we lapse some of the option investigation costs incurred in the second half of the prior year.

We have aggressively looked for-- [TECHNICAL DIFFICULTIES]

One moment, gentlemen.

Mr.

Dixon you may proceed.

Thank you.

We have aggressively looked for cost-saving opportunities to offset the unexpected first quarter pressures we discussed.

Depreciation expense was 4.3% of total revenues for the first quarter compared to 4.1% for the first quarter of the prior year and 3.9% for the sequential quarter.

For fiscal 2007, our expectation for total depreciation expense as a percent of revenues is in the 4.1% to 4.2% range, based on our expected growth in investment plans and taking into account the new East Coast bakery plant that came online in fiscal 2006, and a small additional investment planned for that facility in fiscal 2007.

Actual preopening costs incurred during the first quarter were approximately $3.1 million, compared to $4.3 million for the same quarter last year.

We opened one Grand Lux Cafe in the first quarter of this year, compared to opening two Cheesecake Factory restaurants and the bakery production facility in the same quarter last year.

We also incurred preopening costs in both the current and prior year quarters for other openings in progress.

We usually incur most of our preopening cost during the two months before an opening and the month of our restaurants opening, as a result the timing of our restaurants opening, and their associated preopening costs will always have an impact on our quarterly earnings comparisons.

The preopening cost for our upscale, highly customized, and operational complex restaurants are higher than most restaurant concepts in terms of absolute dollars but are in line with other upscale concepts relative to the scope of operations.

Our expectation for fiscal 2007 total preopening cost is $24 to $25 million in support of as many as 21 new restaurant openings during fiscal 2007 including five Grand Lux Cafes.

This amount also includes approximately $1 to $2 million in preopening costs associated with the Asian test concept.

Again, based on the information we have as of today we plan to open two Cheesecake Factory restaurants in the second quarter, preopening expense for the second quarter should be in the $3 to $4 million range.

To wrap up our operating margin expectations for fiscal 2007, we expect operating margin improvement over fiscal 2006 in the range of 20 to 40 basis points.

This is driven primarily by the cost of sales benefit and lower preopening costs as a percent of revenues, offset partially by the labor costs, other operating costs and depreciation increases.

That covers our review of the major line item components of our operating margins for the first quarter.

Again, please refer to the full discussion of risks and uncertainties associated with our forward-looking statements included in our filings with the SEC.

[TECHNICAL DIFFICULTIES]

Sir, you may proceed.

Included in interest income net is $500,000 of interest expense on the $150 million in outstanding debt we had under the Bridge Credit facility during the quarter.

We completed the permanent financing on April 3, 2007 and also entered into an interest rate caller agreement on that date to mitigate any negative risk from interest rate variation.

The caller will keep our LIBOR rate within the 4.69% to 5.35% range.

We also pay a bank margin on top of LIBOR which will vary based on our debt to EBITDA ration.

Our current interest expense on the $150 million balance is 6%, which translates into approximately $2.3 million of interest expense for the second quarter of fiscal 2007.

We recognize $0.3 million in other income in the first quarter as compared to $1.7 million in other income in the year ago period.

The first quarter of fiscal 2006 included a one time $1.5 million gain related to the value of the land and building contributed by the local government in Rocky Mount, North Carolina for our East Coast bakery production facility which opened during that quarter.

Our effective tax rate for the first quarter was 30%, which was just slightly lower than the 31% we initially projected for the fiscal year.

We currently plan on an effective tax rate of 30% to 31% for the remaining quarters of fiscal 2007, subject to adjustment, if necessary, as we move through the year.

Although we're now on an apples to apples comparison with both the current and last fiscal year containing stock-based compensation expense in the income statement, I'll provide a brief recap of this expense for those investors who are tracking it as a separate line item.

Our total stock-based compensation expense reflected in the income statement for the first quarter was approximately $3.8 million.

Of which 1.7 million was charged to labor expenses and $2.1 million was charged to G&A expenses.

For fiscal 2007 we expect stock-based compensation expense to be approximately $18 to $19 million, of which about $8 million will be charged to labor expenses and approximately $11 million will be charged to G&A expenses.

This is slightly lower than previously forecasted due to a lower valuation expectation and current year grants, and a slightly higher forfeiture experience.

As a percent of revenues this amount is fairly consistent with fiscal 2006.

Lastly, before I move off the income statement let me provide some comments on our recent $200 million accelerated share repurchase or ASR.

We retired 4.7 million shares in the first quarter, which equates to about a reduction of 1 million weighted average shares outstanding for the quarter.

To date we have repurchased 6.7 million shares against the ASR.

The ASR was structured so that the broker delivered an initial minimum number of shares to us up front.

While the initial shares represent the majority of the total number of share we will retire, there may be additional shares delivered to us at the end of the contract period.

We anticipate a weighted average outstanding share count for the second quarter between 73 and 74 million shares.

As we have discussed we expect the impact from the ASR to be neutral to fiscal 2007 earnings per share with the benefit from the new share count offset by the interest expense.

The transaction will be accretive to fiscal 2008 and beyond.

Our share repurchase authorization from our board of directors is currently 16 million shares of which there are approximately 5.7 million shares remaining net of the shares retired in the first quarter and second quarter to date.

The authorization does not require us to purchase any shares and may be terminated at anytime, however, we expect to repurchase shares in the future as a means of offsetting the dilution from stock option expensing.

Our liquidity position and financial flexibility continue to remain very strong.

As of April 3rd, our cash and marketable securities on hand were approximately $102 million.

We utilized $50 million of our cash for the $200 million share repurchase.

Our cash flow from operations for the first quarter was approximately $40 million and our cash and accrued CapEx for the first quarter was approximately $32 million, which includes construction in progress for upcoming 2007 openings.

Our estimated cash CapEx for fiscal 2007 remains in the range of $200 to $210 million this includes the cost for the five Grand Lux Cafes included in our targeted 21 openings.

The large percentage of planned openings in the Northeast which generally have higher than average construction costs and the cost of our Asian test concept.

Based on our current expansion plans and current expectations in the operating environment we expect to be able to finance our CapEx requirements for fiscal 2007 through expected operating cash flow, agreed-upon landlord construction contributions, and our cash on hand.

We continue to believe that maintaining an adequate liquidity position makes good business sense in this operating environment so that both we and our investors can have continued confidence in our ability to execute our growth plan with maximum financial flexibility, knowing that we have the capital already in place to do so.

We have $150 million in funded debt in our capital structure, we currently do not anticipate a need for additional funded debt or any other external financing during fiscal 2007, other than landlord construction contributions to meet our fiscal 2007 growth objectives.

We do have $50 million available on our credit facility for backup liquidity purposes and to support stand-by letters of credit for our insurance arrangements.

So to wrap up our business and financial review our results for the quarter were in line with our expectations.

Revenues were a bit lower than we would have liked due to this severe winter weather, but we were very happy to report positive comparable sales in spite of the weather impact and taking into account the ongoing softness seen by many casual dining operators.

Most importantly, our comparable restaurant sales to date in the second quarter remain positive and in line with our menu price increase.

We managed cost pretty effectively during the first quarter with an ongoing focus on controlling those areas of our P&L that we could affect.

The timing of minimum wage increases relative to the phasing of our menu price increase impacted margins as expected, but the 1.5% menu price increase should offset known cost pressures as we move forward.

We'll have another opportunity to review our menu pricing this summer, however, in addition to using menu price increases to mitigate margin pressure, we are also focused on how we can offset cost increases in other ways.

As always our primary focus remains the long term healthy growth of The Cheesecake Factory and the continued enhancements to our productivity and profitability.

Delivering a great guest experience is our number one priority and we continue to be pleased with the progress of our productivity initiatives, such as the kitchen management system and labor scheduling tool which we believe will allow us to more effectively and efficiently deliver a better experience to our guests.

We still expect KMS to be installed in approximately half of our restaurants by the end of this year, and we are progressing with the roll out of the labor scheduling tool.

On the growth side we are on track to open as many as 19 more restaurants this fiscal year.

We believe our top line growth target of 17% to 18% for fiscal 2007 is an achievable goal and also remain confident that we can achieve our high teens revenue goal over the next few years with high quality and consistency.

We continue to believe there's room for approximately 200 Cheesecake Factory locations and as many as 150 Grand Lux Cafe locations.

With only 133 restaurants open as of today we believe that our business has a sustainable period of profitable growth ahead of it for several years to come.

And their strong financial position provides us with the capital resources and flexibility to continue executing our growth plan with great confidence.

That concludes our prepared remarks for the first quarter, and at this time we'll be happy to answer your questions, so in order to accommodate as many questions as possible and the time we have left on this call, please be courteous and limit yourself to one question, and then requeue with any additional questions, and if we aren't able to get your question on this call, please feel free to call us at our offices after the call.

Operator, we are now ready for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Steven Kron with Goldman Sachs.

Hi, Steven.

Steven, your line is open?

All right.

Let's come back to Steven.

Okay.

Your next question comes from the line of Nicole Miller with Piper Jaffray.

Can you hear me Mike?

Yes, I can hear you.

Okay, I apologize, my first quick question in terms of numbers, what was the dollar stock option on tax expense in G&A, and then could you talk a little bit about if you are seeing anything with day part shift from the standpoint of a contraction or extension of your afternoon or late night hours, and then has there been any difference in weekend sales, Friday and Saturday evening sales?

What was the first question about the G&A.

The stock-option tax related expense--

It was about $1.7 million.

Okay.

Thank you.

And then on the sales questions, nothing unusual in terms of weekend shift versus weekday shift or even day parts for that matter.

And $1.2 million is pre-tax, correct?

Obviously.

That's 1.7 million pre-tax.

.7.

Thank you.

Next question.

Your next question comes from the line of John Glass with CIBC World Markets.

Hi.

Thanks.

I know that the Grand Lux has got a very small comp base.

Maybe you could tell us what the comp base actually is and the number of stores for Grand Lux, but can you talk about how broad that 7% was, was it driven by one unit, for example that may have been an outlier, or was it fairly consistent across the system, and maybe just adding color to that, can you talk about the non-comp unit performance at Grand Lux, and the most recent openings as well?

Well, I can tell you that there's five Grand Lux Cafes in the comp base.

Without a doubt, the Grand Lux at the Venetian is the largest by far, it's certainly our highest volume restaurant in total.

The comp growth, though, in terms of that 7%, was pretty well spread.

I think the Venetian probably had a little bit of a larger impact on it just as a larger restaurant, but we're happy with the comp growth at all of the locations.

The non-comp Grand Lux Cafes, which include Roosevelt Field, Sawgrass, Boca, and Aventura which just opened, very happy with the way all of those have developed, of course Boca and Aventura are very new, but they continue to average weekly sales above $200 or in the $200,000 a weak range which is excellent for us.

Does the average weekly sales growth mimic the comp growth at this point, or are you seeing a honeymoon effect the way you might have at Cheesecake at one time?

We're not seeing a honeymoon effect because the concept isn't nearly as well known obviously as The Cheesecake Factory.

Got you, okay, thank you.

Your next question comes from the line of Jeffrey Bernstein with Lehman Brothers.

Thank you.

Question on comps as it pertains to earnings guidance.

I'm just wondering what you're currently assuming in your model for comps as we look through '07?

I know you have 1.5% menu pricing now with an another increase midsummer and I know you typically said comp guidance is in line with pricing, but I'm just wondering about your thoughts on traffic and mix especially a lap in negative compares--?

I think as we said on the last call, Jeff, that we're being hopefully conservative, but, our expectations on comp sales growth really are the menu price increase, so the 1.5% and then we take another point or so in the summer, perhaps, love to see some of the traffic come back, but we're not anticipating that, so that could give us favorable upside so we're just modeling the menu price increase.

Just in terms of--obviously you have seen strong numbers thus far in April, I'm just wondering--even of late, over the past month or two, can you talk about what you are seeing in terms of improvement, whether it's traffic or mix shift or kind of what you see when you dig into the numbers in terms of what is driving the improvement lately, thanks?

I think the improvement is really traffic--I'm sorry is really the menu price increase.

We are-- we are tracking comp sales increase right back about what we expected to see from menu price increase standpoint.

So again, that's kind of why we have taken the stance in terms of projecting comps in that menu price range not anticipating the traffic coming back the way it had.

I thought you had mentioned something about mix shift, just wondering whether you were seeing trade down, trade up--?

That was really just in the cost of sale, a little bit of a mix shift in cost of--I think fish has become more popular which somewhat expected with the way people are eating this way, but nothing too significant.

Thank you.

Your next question comes from the line of Zackfia with William Blair.

Wow, I just go by one name now, can you hear me okay?

Yes, I can hear you, thank you.

I have a few questions, and excuse me if you answered these, because I got lost somewhere in all the static.

So on the janitorial contract where was that this quarter?

That shows up in other operating expenses.

What did it come in at--the penalty?

It is slightly more than $1 million.

Okay, and where did you put the taxes on the options?

In G&A.

Okay.

and where did that come in at?

$1.7 million.

Okay, so that was the question your answered earlier.

Right.

All right, and then on the share count, I thought that you did the entire $200 million in repurchase which I thought would have been more than 4.7 million shares, so did I lose something there?

No.

The way the program works is that a portion of the minimum shares are delivered immediately, so we received 4.7 million at that time, and then we received 2 million shares just after the quarter ended, so we've received 6.7 million shares so far and there could be additional that come as the contract unfolds.

Okay, so the share count would go lower then again in the third quarter, is that the expectation?

Potentially, again.

And then, I think was it.

Thanks so much.

Thank you, Sharon.

Your next question comes from Bryan Elliott with Raymond James.

Good afternoon.

Help me understand the sales line a little bit.

The average unit sales.

You talked--you gave us sort of average square footage for I think the stores that are outside of the comp base, so if I took--if I did simple algebra on that would I be able to come up with sort of the effective change in seats and compare that to average weekly sales and get a lot closer to flattish sales per seat than the down 1.5, I think, average unit sales that we saw today?

I suppose you could do that.

As I indicated the number of seats is about 5% less on those restaurants not in the comp base than those that are in.

So there are smaller restaurants.

That's part of the impact, I believe on the lower average weekly sales.

Certainly it's a slower environmental [draw] but that's part of the impact that needs to be factored in.

Would sales per seat be flat, if I did that math?

That was my question.

I haven't done it, and so I don't want to answer that off the top of my head, but I'll be happy to look at that.

Okay, and also if you could share with us the conference call carrier so we can adjust our personal portfolios?

That's part of our cost saving initiatives.

Thank you.

Thanks, Bryan.

Your next question comes from the line of Ashley Woodruff with FBR.

Just another question on the same store sales trends very the average weekly sales trends.

You saw that spread between the two of them really narrow in the fourth quarter and then obviously widened again in the first quarter.

Which one is--which one is the anomaly?

Was there something unusual in the fourth quarter that made that spread narrow and so we should kind of look at the trend we're seeing in the first quarter?

I think-- I think it's-- again, Ashley it's the timing of the new restaurant openings, as we had so many openings that opened in the fourth quarter, late third quarter that were in that-- whatever level of honeymoon period we would expect to see, that's where you saw some of that gap close, now as we get further away from that, that's what you are seeing in terms of lighting.

So it's always going to fluctuate depending upon where we are in the number of openings and where those openings are in their honeymoon curve, if any.

This year I think you said your opening--the new stores will be about the same size as the ones you opened last year so you shouldn't have that same impact of the 5% smaller stores, so should that, gap start to narrow by the end of this year?

David, you might want to chime in on this, but certainly the stores that we're opening this year are a little bit bigger on average than what we did last year, probably closer to the average--what's in the comp base, so I would expect to see that--the benefit from those especially with the number opening in Northeast and some pretty dense markets where I think we'll see some good volume.

Right.

I agree.

All right.

Thank you.

Your next question comes from the line of Paul Westra with Cowen & Company.

Hi, good afternoon.

Hi, Paul.

How are you?

First on your G&A guidance I think you implied that you are get going to get some pretty decent leverage in the second half, I think you forecasted five for the year and you are up here in the first and plan to be up here in the second with the janitorial contracts, I was wondering what may have changed and where some of that leverage is coming from?

Well, again, what I mentioned was that I expect to see leverage, because we had some pretty high G&A at the end of last year with some of the stock-option investigation costs that were reflected in that and knock on wood we won't see any of those types of costs coming in to this year, so we'll leverage those as we lap those.

I was thinking at the end of the fourth quarter you guided flat for the year then you ran in to some of the janitorial, and you're still looking for flat--?

The janitorial--no, the 409a costs which reflected in G&A, that's--that's a little bit of the pressure, but we have looked for ways to offset those costs as I mentioned at the Investor Day we have been aggressively looking for some cost-saving opportunities.

So I believe we've been able to--some of the things we've been doing offset some of those costs and still be able to come in flat for the year.

And second quick question, I think my cash balance is correct, sounds like you plan on keeping about $50 million in cash and marketable securities on a go-forward basis is that true?

No, I think--what I mentioned was we used $50 million of our own cash in the accelerated share repurchase.

$50 million of that 200 was our own cash.

We're at slightly over $100 million, that's a decent balance for us, but we'll also continue to be active in the share repurchase market.

Post the $200 million purchase, it seems like there's $50 million of liquidity left, is that true?

I'm sorry.

Say that again.

Once you have completed the $200 million purchase, I think the--I mean, my numbers come out to be that you'll have $50 million remaining of cash or liquid securities--?

We have already funded our $50 million.

So of the $200 million, that has already been paid, $50 million of that cash balance came out of our balance sheet and so the $102 million on our cash and marketable securities on our balance sheet at the end of the first quarter is already net of that repurchase.

Okay.

And--okay, and that's what you plan--you plan to keep that balance as a go-forward number?

Well, again it will fluctuate but we don't have any other plans at this moment to allocate those funds towards a repurchase or anything else, although, the repurchase opportunities are available to us.

Great.

Thank you.

Your next question comes from the line of David Tarantino with Robert W.

Baird.

Good afternoon.

Just a clarification question, did you say that you have assumed about a point of price increase for your summer menu change?

I think it's--that's still as yet undetermined.

I think there's a lot of things that will factor in to that.

I was just using that based on some of our past averages on an annual basis, that is not a firm number yet.

As we continue to evaluate margin pressures, we're waiting to see at this point what happens with the federal minimum wage, a couple of those things will factor into the summer menu price increases.

Okay, so it's fair to assume that comps in the second half might be a little higher if you are assuming that you'll take some pricing there?

I think that's fair to assume, yes.

Okay.

Great.

Thanks.

And then lastly, I was wondering if you could give an update on the test of the bar menu, and what you are seeing there, and if you have made any decisions to roll that out.

David, you want to address that one?

Yes, we're--we've just done our training for the restaurant, and it's going to start to roll out in a couple of weeks, so we are going to go ahead and put that in 90% of our stores, but it will start to go into the stores in a week or two.

Great.

Thank you.

You're welcome.

Your next question comes from the line of Destin Tompkins with Morgan Keegan.

Thanks, Mike, when you mentioned the same store sales Q2 today of 1.2%, I assume that's a blended number?

That's correct.

Okay, and would it be fair to assume that Grand Lux is probably seeing similar trends as what we saw in Q1?

That's more or less true, yes.

Okay, and then on commodities, obviously you feel pretty good about 2007, but we have begun to hear some companies talk about pressure in the back half of the year, and especially more out there in 2008.

Do you have any interesting thoughts there?

I don't anticipate pressures in the back half of 2007, just because of our contracts.

We are concerned about 2008, and will be examining those closely to see if there's any way we can extend current contracts, whatever we can do that would allow us to minimize the impact, but there's certainly going to be some impact in a number of areas in 2008 as a lot of these contracts come up for renewal, but I think just like everybody else we're in a little bit of wait and see with what happens with corn prices and some other things that is really driving a lot of that.

Great.

Thank you.

Your next question comes from the line of Mike Smith with Oppenheimer.

Good afternoon.

Hi, Mike.

I had just a couple of easy questions, and I don't know that you'll answer them or not, but when you were going through the fact that you always have a second half weighted opening schedule and golly, you had to open 13 in the fourth quarter last year, I get a lot of questions about how you can do that.

I think I have a reasonably good answer, but is there any way we could learn the number of units that are under construction and when they started the construction, considering the--the four to six month permitting and construction lead time?

Not quite sure I follow that but in terms of--you are trying to get a better read on the third and fourth quarter openings by quarter or--?

Well, no, not necessarily by quarter, but I would like to know--I guess what I would like to know is if you go under construction for a restaurant, let's say in June, we can presume that's going to be a fourth quarter opening, right?

Most likely, yes.

And so I guess what I'm kind of wondering if on a quarterly basis you could give us an under construction figure, for instance, how many units are currently under construction because those would likely be third quarter opening.

Yes, we could try to do that but I'm not sure that that's helpful.

I think when we have visibility as to when they are going to open we certainly share that with you.

We have the two planned for the second quarter as I mentioned.

The remaining 18 somehow split between the third and fourth quarter, but we're certainly confident that they're all--we're going to hit that 18 number by the--in this fiscal year.

Even once we start construction, there's no guarantee that other things won't happen along the way, so I would be a little hesitant to give you that.

I'd just as soon stick with giving you good opening numbers by quarter once we are confident with them.

Okay.

One other question, when you were talking about the stock-based compensation actually being a little lower this year than it was last year, I think you mentioned forfeitures.

Would that have--does that have any indication on what kind of turn over you are seeing at the--at the GM and the district level?

Not really.

I think we had--as we talked about on our last call, Peter D'Amelio our President left and so there was some impact from a forfeiture perspective on options for him, and then we also had a CIO that retired earlier last year that also had a little bit of impact, so it just certainly, I think in more of a senior level that that had a favorable impact for us as we looked at this year.

So the GM turnover and those majors really haven't changed much?

Not at all, the GM turnover is still practically zero as we've talked about in the past.

My last question, the bar menu that you are going to put in, you have tested.

Has that had any kind of impact on same-store sales of those units that you did test it in?

It's really too new.

We haven't really tested it at Cheesecake, and again, it's--it's slight, but it's worth doing--it's--we believe it's worth doing, so I can't give you the number yet.

Mike, do you have anything on that?

No, I think just to clarify a little bit on David's comments.

We've had it in Grand Lux we have seen some benefit there, we believe, so we're really just getting ready to test it in Cheesecake, but even then we don't anticipate a significant increase from that.

Again, it's a nice guest service initiative that we hope will drive a little bit of traffic in some of the--the mid-afternoon or early dinner period, but it's not going to be a huge driver, no

Okay, thanks.

Your next question comes from the line of John Glass with CIBC World Markets.

Thanks, Mike, the minimum wage bill has been proposed now, that both the House and Senate agree on does not have a provision to increase the tip minimum wage, so if minimum wage were to go up on the hourly basis, but tip minimum wouldn't, would you see an impact in your business or would that sort of irradicate that concern about higher minimum wage?

I believe we would not see an immediate impact.

I do believe that there would be some wage compression that you would feel over time.

But no, since really the only minimum wage employees we have are at the tip credit levels, I don't really anticipate that there would be much of an impact from that.

That's a good comment.

Okay, and then when you think about openings this year, 75% to 80% will be in existing markets so that's more than it was last year.

I think one of the factors that has widen the gap between same store sales and average [inaudible] sales has been that cannibalization effect.

So wouldn't it widen as the year progresses, that gap because there is potential for some of that cannibalization or how do you think about it and what factor you use when you think about cannibalization?

Well the tools that we use--I guess taking a step back.

We have seen a little bit of cannibalization when we've gone into some of the existing markets, but we're pretty cautious about where we open and how close we open to existing locations.

The tools that we use now help to give us a little bit of a visibility ahead of time as to what cannibalization may be, you might recall that from the Investor Day presentation.

So, I'm not-- I'm less concerned about that, and while that may have had a slight impact on the disparity between comps and average weekly sales, I don't think that's the real driver.

I believe that the markets that we're going back into especially in areas like the Northeast, up in your markets, John, that are incredibly dense from a population standpoint and will continue to support high volume Cheesecake Factory restaurants.

Thank you.

Your next question is a follow-up from Nicole Miller with Piper Jaffray.

Hi there.

I just wanted to clarify on the same store sales.

Can you talk us through at the system level the 0.4%, what was price and what was traffic, or on a concept basis either way?

Well, I think the easiest way, Nicole is that we really had--from a price perspective we had 1% menu price at The Cheesecake Factory that we were lapping, and the 1.5% increase went in by mid-February, so you have got some weighted benefit of that, so guessing you somewhere between 1% to 1.2% probably effective price increase in the menu.

Okay, and that's at the cake units?

That's right.

And what is the average check right now at The Cheesecake Factory?

We finished last year at $17.50.

$17.50 end of '06.

And with the--the latest menu rollout I know there's been a little bit of a focus on, I might not use the right terminology, but weight management, I think is the headline for some of the items.

Are you seeing any traffic in that, and then also just with some of the different portion sizes, you've provided recently, do you see anything where hypothetically speaking a couple would have come in, two people and shared, for examples a $20.00 dish and now they're coming in and each ordering a smaller $12.00 dish, and if so, what impact does that have to margins?

I don't think we are tracking that.

First of all, those portions are only at lunchtime and I think it just gives people more variety instead of ordering a sandwich or something light they're able to order a pasta or something else and not have to split it.

Whether we're getting a little push from that, I think it's hard to tell.

I think that anything that is delicious and healthy is selling these days.

The weight management is doing well, our low carb cheesecake is still number 12 in our list, which is--so there's still people that are ordering that in our last Grand Lux menu we put on a protein breakfast--on this one coming up and in our test.

Many people are ordering that, so people are health conscious as long as you can present the dish in the right way.

Great feedback, thank you.

Also, on the food and alcohol side are you seeing any trade down from alcohol to non-alcohol or from sodas to water and any trade down in entrees, to use an example from steak to chicken or something of that nature?

Not at all, we don't sell very many steaks, it's pretty low for us.

Chicken is our big seller, but no, our alcohol sales are very strong, there might be a little movement between liquor, beer and wine, but I don't think it's because of price.

Okay, and then just to clarify my earlier question on the day parts.

This is probably going back at least six months but you'd talked about probably the fall off was in the afternoon periods and late evening, so when I asked if there was a change, there's been--is that just a similar pattern, there's been no improvement and no erosion at those day parts?

There may be improvement, but it's a just not major or anything that we can point to.

As we're saying, we think that we're getting our price increase, we're not losing any traffic.

In some of our restaurants it's coming back, but we're not attributing all of this just to traffic increase.

Certainly we're not seeing anything go away.

Okay, great, and then my final question and I'll hop off, can you just give us an update on KDS and KMS and what percent of the system you are in currently and then how that factors in for the rest of the year?

We're in 50% of the restaurants if I'm not--am I correct, Mike?

We'll be in 50% by the end of the year.

Right, and then we'll continue to do all new restaurants [TECHNICAL DIFFICULTIES] and maybe 10% of the older restaurants each year.

Thank you very much.

Maybe two more questions.

Okay.

Your next question comes from Conrad Lyon with FTN Midwest.

Most of my questions have been answered but maybe I'll just follow on the KMS, more of an overview.

Should we look at it more as an '08 enhancement, just kind of a low-cost way to enhance traffic?

I don't know if it-- it's truly an efficiency improvement.

Again, in the restaurants that it's operating in, we have been very happy for new restaurants and how quick the learning curve is for the kitchen operations to get up to speed.

As we talked about at the Investor Day, I think that there's some opportunities for some labor savings.

I also believe that from the tests we have been able to do a comparative before and after, we have seen some--little bit of productivity improvements in terms of traffic turns or overall sales during the peak meal period so there is an opportunity for it to be a little bit of a traffic driver but again, there's a lot of reasons for implementing this tool.

Okay, thank you.

Thanks, Conrad.

Last question.

Your final question comes from Chris O'Cull with SunTrust.

Good afternoon, guys.

Hi, Chris.

Hi.

Question on the preopening guidance.

It looks like the center point of the guidance was lowered by about $1 million.

And it looks like you are projecting preopening similar to what you ran last year, yet last year you incurred more cost with the fresh dough facility.

So is there--can you kind of give us some color on why you expect preopening to be somewhat higher per unit this year?

Well, I think you are-- I'm not sure I get the full question.

The first part of the question is yes, we did lower the guidance from what we gave at the end of last quarter, which again, goes back to somebody else's earlier question.

When we looked at some of the cost pressures we were facing in the first quarter, the unexpected items, we have gone back and scrubbed a number of items very carefully and looked for opportunity to save money and preopening was one that we feel we can still open our restaurants with the same level of quality we need to and still--and save a little bit of money, so that's why we've been able to lower that estimate.

In terms of the cost per new restaurant or per restaurants rather, haven't really changed that from our previous guidance.

Again, there is--we put $1 to $2 million in there for the Asian test concept.

We do have five Grand Lux Cafes, which has slightly higher cost, but our expectation on a per restaurant has been lowered overall as we look for some cost savings, but that's really about it.

Okay, and then one last question on the interest expense, the $2.3 million was that the net interest expense net with interest income or is that just the--?

That's just the pure interest expense on the outstanding debt.

Okay, and the cash balance of roughly $100 million, are you assuming-- what kind of rate in terms of interest income should we--?

You can look at interest rates, but a 5% range is reasonable.

Okay, so most of it will be with commercial paper?

That's right.

Okay, and is that a fair assumption in terms of interest expense for each of the following quarters, the third quarter and fourth quarter as well?

At this point, yes.

Again, we've pretty well locked that rate in, although there could be a little bit of fluctuation on it and we do not anticipate drawing any more on that credit facility.

Okay, so it was swapped or hedged?

It was hedged, correct.

Okay, great, thanks.

Thanks, Chris.

Thank you everybody.

I apologize for the technical difficulties, and I certainly hope the message came across clear, but thanks for your time.

This concludes today's conference call.

You may now disconnect.